New Zealand’s need for growth capital

As early stage investors we need to start getting real about the wisdom of our backing early stage, high growth ventures without far more consideration being given to where we source follow-on growth capital.

Even if we only look at last year’s New Zealand Venture Investment Fund’s seed co-investment data where about $50million was invested in early stage companies, the growth capital required for this cohort of companies is likely to be 10x this figure. So we are talking about finding $500m.

This is not just a problem for the investors in these companies; it’s a problem we need to grapple with in partnership with the government and the institutional investment community. These high growth companies are the engines of our economic growth. We can’t afford to drop the ball.

The development of an innovation led economy is widely accepted to take place over three ten-year horizons. We are coming to the end of ‘horizon one’ where the focus has been on inputs. New Zealand has done well here. The number of startups, early stage investors and dollars being invested has trended upwards over this period.

In the second ten-year horizon we should start to see outcomes from these innovation led companies in the form of jobs, export and tax revenue. But to generate these outcomes and see the true benefit of this investment, we need growth capital. Only then will the third horizon truly deliver in the form of financial returns and recycled capital and ultimately higher standards of living.

As I’ve just mentioned, there is no shortage of deal flow. The quality of that deal flow is improving every year too. This is in large part due to Government support for initiatives such as the Lightning Lab and the investor-led Tech Incubators. It is also a result of work others have done to upskill our entrepreneurs and angel investors.

To date, angels and other early stage investors have been able to fund the early growth of the companies meeting their criteria. We have been investing in startup, high growth ventures in a targeted sense for about 8 years but the really exponential upswing in investment has taken place in the last 3-4 years.

Quite logically, there is therefore an increasing and pressing need for growth capital in New Zealand.

This is illustrated in the recently released NZVIF data showing most investment is into existing deals. Angels are having the stay the course longer and dip back in their pockets for capital it could be argued should be coming from deeper more experienced pockets.

We need to give credit to those venture capital firms raising funds to meet the need for growth capital such as Movac’s Fund 4, the $40m fund GD1 is working hard to raise and the $40m fund raised by Oriens Capital. But it is not enough.

Closing the “growth capital gap” is going to need New Zealand’s pension and other institutional funds to broaden their investment mandates to allocate at least 3-5% to the growth needs of our high growth, early stage companies. We must support work Immigration NZ is doing to inject capital from experienced high network migrants into these companies. We need to tap into our rural and regional wealth more effectively. We have therefore been delighted to see angel networks forming in Taranaki and Marlborough reflecting an increasing awareness that high growth, tech based companies can be the source of future jobs and social and economic wealth in the regions. The banks also need to come to the party.

There is a great deal at stake here. We can’t afford “a hands off, market forces will deliver” approach. If ever a NZ Inc approach was needed, it is now.

Marcel Van Den Assum
Chairman
Angel Association New Zealand

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Acquisition Process

The following interview with Bob Kelly was conducted at the Asian Business Angels Forum and AANZ Summit 2015.

Bob Kelly talks about what should entrepreneurs and angels know about the corporation acquisition process.

You can meet a quality network of investors and experts in early-stage company growth, acquisition and exits in person by registering your place at the 9th Annual NZ Angel Summit 2016.

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Improving volume of exits in NZ’s early-stage investment community

In the following interview with Bob Kelly, conducted at the Asian Business Angels Forum and AANZ Summit 2015, he talks about the challenges New Zealand Angel community have to face.

 

You can meet a quality network of investors and experts in early-stage company growth, acquisition and exits in person by registering your place at the 9th Annual NZ Angel Summit 2016.

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What kind of angel backed companies are corporate acquires looking for?

During the Asian Business Angels Forum and AANZ Summit 2015 we talked to Bob Kelly, Vice President Mergers and Acquisition at Microsoft.

In this interview Bob Kelly talks about how he chooses the companies he buys.

You can meet a quality network of investors and experts in early-stage company growth, acquisition and exits in person by registering your place at the 9th Annual NZ Angel Summit 2016.

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What Angel Investors need to know about corporate acquirers?

The following interview with Bob Kelly, Vice President Mergers and Acquisition at Microsoft, was conducted at the Asian Business Angels Forum and AANZ Summit 2015.

Bob Kelly talks about what kind of companies he is looking for how how they must align with Microsoft missions.

You can meet a quality network of investors and experts in early-stage company growth, acquisition and exits in person by registering your place at the 9th Annual NZ Angel Summit 2016.

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Should angel backed companies focus on global scale or great product?

We have interviewed Bob Kelly at the Asian Business Angels Forum and AANZ Summit 2015. And in this video Bob tells us his toughts on global scale versus great product.

You can meet a quality network of investors and experts in early-stage company growth, acquisition and exits in person by registering your place at the 9th Annual NZ Angel Summit 2016.

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ACA Report 3: Corporate Acquirers & Acquisition Strategy

Another instalment from ACA Summit 2014.

This session on corporate acquirers was sponsored by Procter and Gamble. Steve Baggot represented the company on the panel. Also on the panel were Frank Ball from New Dominion Angels who moderated the session. Michael Loria from IBM and Peter Rosenblum from Foley Hoag Law Firm also spoke.

CORPORATE ACQUIRERS – how to engage, deal sizes, commoneerrors and what breaks deals

Steve Baggot from Proctor and Gamble, said they do a deal every three days. JVs, licensing etc

Foley Hoag – Peter Rosenblum noted his firm help clients create strategy around deals

IBM’s – Michael Loria said his firm try to approach opportunities without determining structure of the deal until they understand the opportunity. More and more they are seeing the need to incubate an opportunity they have spotted. Sometimes they may buy an “option opportunity” in that business and often want access to customer base and sales team. They tend to “either have to drive or absolutely sit in the back seat”. This then means they can have quite a long relationship with the opportunity before they buy it.

Building a relationship is vital. It’s a long process. Using relationships as a runway to an acquisition.

What happens to the people? At P&G many people are there from acquisitions.

Most of the opportunities they are looking for are ‘what is keeping people up at night’ – problems the company is trying to solve. Steve likes the things that are serendipitous, but these still have to meet the test of strategy and business fit.

Law firms like Foley Hoag often help with the match making between venture and acquirer. But specialised law firms are better at the strategy than the match making. They can also help with investment banker identification. But be wary of whether you actually need these guys.

How do acquirers communicate their needs? Check their website. But this is generally only a slice of what they need. Always be on the look out for big acquirers looking to Invite people to share what they are working on.

It’s often a good idea to contact regional offices. Most will have entres into the acquiring dept of the big corporate. Odds of reaching the relevant person or even the acquiring team or department on your own are about zero. Look for someone to provide an introduction.

Make sure your legal or investment banking teams have credibility with the acquirer. Make sure they know the acquirers strategy and market, intimately and practically. Be wary of the business development guys at investment banking firms. They can become conflicted. And be sure, in the same way you appreciate the conflicting drivers when you are talking to the sales team at a corporate acquirer too.
Neither care about how big the company is that they are acquiring.

Almost all corporate acquirers won’t be getting into DD until they are quite sure it is a strategic fit. Then if it is a fit “about 10 billion” people will show up on your door step. And will they require tons of data. Internal data and intel about the company and about your market.

They will then review the business fit to be sure the acquirer can extract the value. Some deals take 21 days, some two years.

One of the first questions to ask a potential acquirer is do you have people and budget for acquisition – you need a “yes” to both questions and dig a little deeper on this too. Be sure the answer is “yes”. Strategic and resource fit are important.

A lot of deals fall over on IP issues. Sometimes trade marks. Corporate acquirers generally want all IP in the company but not always. Software business – big bump in a deal is often caused if the relevant software is open source. Most big companies don’t like it. Contracts are another bump in the road. Distribution relationship can be a potential land-mine if it’s with a competitor of the acquirer. Even some existing customers can be a problem to an acquirer, especially if you can’t get rid of them easily so that your acquirer can sell to their own customer base.

As an Angel Investor director you have to help your companies understand how they will manage the business while acquisition is going on. So often the company falls over while a deal is being done… often running out of cash because they neglect sales generation.

The modern style of doing a deal is to set up an electronic data room. Be sure you know which things you should and shouldn’t show the acquirer. Some things they shouldn’t see until they have bought the business

Valuation is the biggest derailer. Passion gets in the way of a clear eyed view of the real value. Based on data and research plans. Ask yourself, how do we learn together to get to an aligned view on valuation. Look at comparables in the market. And look at the risk. What is it worth to us. But every case is specific.

The heart of the issue for Angel’s is  – what can we expect our Investee to do in the buyers environment – not necessarily what it is doing in its current environment.

It’s not about what you have but how the buyer might look at it.

On my way home from the ACA Summit 2014, via Boulder I visited Trimble Navigation – employing over 3000 people, selling over 500 products in 35 countries and making GPS receivers, laser rangefinders and inertial navigation systems. Trimble have acquired 80 (yup, 80!) companies in the last 4-5 years. Some of these from NZ. They just recently acquired an Auckland company for $10m+. So the message is clear, American buyers are active! Good news for New Zealand Angels and their Investees.

– Suse Reynolds, from Washington, DC, USA

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